The Market Ecosystem in the Age of Algorithms : An Analysis of Trading Dynamics and Market Quality

A unique dataset from NASDAQ OMX Nordic facilitates an in-depth analysis of various trader categories, shedding light on their roles within the trading ecosystem. Our investigation specifically focuses on the effect of algorithmic traders on market quality, compared to the activities of other market participants under diverse conditions. Our findings suggest that algorithmic traders, in comparison to other traders, contribute to narrower spreads, especially in highly volatile markets, and promote more trading of shares at the National Best Bid and Offer (NBBO). We further identify the primary factors influencing the liquidity provisions and order cancellation patterns of algorithmic traders. Lastly, we suggest using monthly fluctuations in electricity prices as a measure of algorithmic trading activity, and a weather comfort index as a proxy for retail trading activity